Cherry Hill Mortgage Investment Corporation (CHMI) Q2 2025 Earnings Call Transcript

Cherry Hill Mortgage Investment Corporation (CHMI) reported a Q2 2025 GAAP net loss of $0.03 per diluted share and a decline in book value to $3.34, primarily attributed to significant intra-quarter market volatility and Agency MBS underperformance. Despite these challenges, the company maintained prudent leverage at 5.3x and raised $9 million via its ATM program. Looking ahead, CHMI anticipates potential Fed rate cuts starting in September, which could enable a more "risk-on" investment strategy and a modest increase in leverage, while also highlighting a strategic investment in digital mortgage technology firm Real Genius LLC, expected to yield dividends within the first year.

Analysis

Cherry Hill Mortgage Investment Corporation (CHMI) reported a challenging second quarter, marked by a GAAP net loss of $0.03 per share and a 6.7% sequential decline in book value to $3.34 per share. This negative performance was primarily attributed to significant market volatility, particularly in April, which caused the Agency MBS basis to underperform the company's swap and treasury hedges. Despite the volatility, the company maintained a prudent financial position, with leverage remaining stable at 5.3x and a solid liquidity profile of $58 million in unrestricted cash, bolstered by a $9 million capital raise through its ATM program. Management has strategically positioned the portfolio for an anticipated Federal Reserve rate-cutting cycle beginning in September, which it believes will make spread assets more attractive. This is reflected in a modest shift towards higher-coupon RMBS and an evolving hedge book that increasingly utilizes Treasury futures. A new strategic investment in digital mortgage technology firm Real Genius, expected to become profitable within seven months, signals an intent to explore accretive opportunities beyond traditional MSR and RMBS assets. The company's outlook is cautiously optimistic, contingent on a stabilizing economic environment and a more accommodative Fed, which would prompt a shift to a more 'risk-on' investment approach and a gradual increase in leverage.

Key Decisions for Investors

• Investors should recognize that the investment thesis for CHMI is heavily tied to the company's correct anticipation of a Fed rate-cutting cycle beginning in September; the firm's plan to increase leverage and adopt a 'risk-on' posture is entirely dependent on this macroeconomic shift.
• Monitor the performance of the mortgage basis relative to Treasury and swap hedges, as this was the primary driver of the book value decline to $3.34 and will be critical for any potential recovery in net asset value.
• Evaluate the sustainability of the $0.15 quarterly dividend, which currently exceeds the $0.10 in Earnings Available for Distribution (EAD), by tracking the company's taxable income and the return generated from its strategic pivot into assets like the Real Genius platform.
• A key risk to consider is a 'higher-for-longer' interest rate scenario or continued volatility, which would challenge management's outlook, likely suppress portfolio returns, and delay the planned increase in leverage.